GREAT RECESSION VERSUS THE GREAT DEPRESSION - III

In this comparison of the Great Recession to the Great Depression, a look will be taken at an economic comparison and what, seems to me, to be rather a revisionist examination made in 2014 by Neil Howe  in that, while the GDP increased exceptionally well, unemployment remained high.*  One similarity is that both these "Greats" were financial collapses that were different from your ordinary recession which are usually due to inventory buildups.  Part I concerned the emotional hangover from the Great Depression and Great Recession.  Part II concerned the economics of some of the Rust Belt of states prior to and including the Great Recession.  The Great Depression did not have a cascade of job losses prior to 1929 that happened prior to the Great Recession (see Part II).

In the figure below, it is seen that the GDP has been slowly increasing since 2009, the depth of the Great Recession.  In contrast the dip in the Great Depression that started in 1929  had the GDP of the U.S. rising sharply less than five years after its beginning.

I was born in 1931 so I was only 10 yrs 8 mo. old at the beginning of WW-II and the GDP is shown to be well into positive territory see figure below).  Although my memory is limited, my main memory was that you could get a good-sized chocolate candy bar for a nickel and some bars were three for a dime.

The other thing I remember is men coming door to door and asking if they could mow the lawn or do other odd jobs for food.  My mother used to give them something but would not invite them inside.  I also remember a man coming to the door with a basket full of fine China (made by a German company) having marbleized centers and a gold rim.  My mother had also bought some of this same China a few years earlier (I don't know if it was from the same man).  So my memory is not conducive to their being good times prior to WW-II and  all studies do show unemployment to still be very high by 1939 and 1940 though they differ on the percentage unemployment (9.5% or greater).

In spite of my memories of the late 1930s, GDP bottomed in 1932 - 1933 and began a steep rise.  In contrast, the GDP decline was not as great in the Great Recession but bottomed in 2009 and began a relatively slow but steady rise. 

(Click on figure to enlarge)

Though the percentage drop in the stock markets were comparable between the two Greats, the  recovery of the stock market after the Great Recession has been quite remarkable and much better than for the Great Depression.  The figure below shows the comparison for the Dow Jones Industrial Average (The increase has continued beyond the period in the figure and has been repeatedly been setting new all-time highs lately for all four principal indices (DJIA, S&P 500, NASDAQ Composite, and Russell 2000).**

(click on figure to enlarge)

Quoting Mr. Howe, however, suggests a roaring economy for the Great Depression, "GDP grew at a blistering average rate" (though unemployment remained high):
What’s more, from 1933 on, U.S. GDP grew at a blistering average rate of over 8% per year for the next eight years. And that includes one recession year: 1938. By 1941, 12 years after the Great Depression began, U.S. GDP was 41% higher than its pre-downturn figure. This is almost certainly a much higher level, relative to 1929, than the United States will see by 2019, relative to 2007.*
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Mr. Howe does conclude that:
These parallels between eras are so numerous and striking that they are hard to miss once we look broadly at the direction of events. That’s why connecting the economic challenges of the 1930s with those of the 2010s, and seeing them as comparable in some respects, makes a difference. When we are connected to history, we can comprehend better what else is happening in the 2010s, predict better what is likely to happen next, and to figure out, if necessary, how we can avoid an outcome that we regard as especially dangerous.


Note On Recessions A list of the Recessions in the U.S. can be seen in Wikipedia including the dates, duration, interval time between recessions, peak unemployment, and GDP decline.** * The GDP decline of the Great Recession is seen to have been only greater during the Great Depression and the "recession" of 1938 (I would say it was a part of the Great Depression) and the recession of 1945 that occurred while industry converted from wartime production back to peacetime.  Though the GDP decline in 1945 was larger than for the Great Recession, unemployment in 1945 did not reach the depths of the Great Recession.  The only recession worse in unemployment than the Great Recession was that of the long recession of the early 1980s, though the long recession of 1973 - 1975 came close.

* http://www.forbes.com/sites/neilhowe/2014/11/25/are-we-reliving-the-1930s/#57204a703a6c
** https://en.wikipedia.org/wiki/Comparisons_between_the_Great_Recession_and_the_Great_Depression
*** https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
https://www.thebalance.com/us-gdp-by-year-3305543

GREAT RECESSION VERSUS THE GREAT DEPRESSION - II

Part I of the comparison between the Great Recession versus the Great Depression dealt with the emotional after effects of a financial collapse for a country like the U.S.  Herein I will only discuss the economic effects of the Great Recession on labor wages in the Upper Midwest.  This region is often called the Rust Belt, a term that became popular back in the 1980s.  So the labor problems of the Rust Belt have been around for a long time and have little to do with the Great Recession.  Nonetheless, the angry "white" Midwestern workers came to a boil in the recent election.  So why now?

 Every so often on Morning Joe, they have Steve Rattner give the status of some economic condition.  I thought Rattner presented two very compelling charts on the December 1, 2016 show that I have captured related to some of the angry feelings in the Midwest towards government.  Of course one should notice in the figure that the steep decline in Rust Belt manufacturing jobs started well before the Great Recession, mostly during the administration of George W. Bush, with a particularly steep drop ("waterfall") going into the Great Recession.   Such improvement as there has been was during the administration of Barack Obama.  Note that with the Obama administration the decline in manufacturing workforce has stopped and has even started a slow recovery in all the states except Pennsylvania.  You would think that workers would be happy that the decline (the bleeding so to speak) has not only stopped, but actually has slowly reversed in most states.  However, we  are told they aren't happy at all, so the reason for their anger must be sought elsewhere, such as the emotional effects of the Great Recession (see Part 1).  but before we get too hysterical about this, please recall that Trump won these states by very small margins Michigan by less than 11,000 votes out of more than 4.8 million votes cast and Wisconsin by 27,200 out of 2.9 million votes cast and for Pennsylvania won by 46,530 votes out of nearly 6.9 million votes cast.), so maybe many people were grateful for the progress after all.

Below is some of the text of Rattner's presentation (in italics):

(Click on figure to enlarge)

The role that white working class voters played in Trump’s election is now widely accepted; this chart provides graphic back up for how tough it has been for these workers over nearly two decades and how minimal the much vaunted renaissance of manufacturing has been. ...  Pennsylvania, once the home of the steel industry, has had no recovery in manufacturing jobs since the financial crisis.

Only Michigan – thanks to the success of the auto industry – has shown a meaningful rebound in manufacturing jobs and even Michigan’s total is still just two-thirds of what it was at the peak.

It’s important to recognize that not all these job losses are due to trade or globalization; improving efficiency also played a role in the lower need for workers (although those productivity gains have been minimal in the last several years.)*

(Click on figure to enlarge)

Note in the above figure, that although jobs have had a rebound in Michigan, the decline in wages that started long before the Great Recession has continued since, though at a slower pace.  One can see some cause for anger there.  Something like "It is nice to see my friends get back to work, but not at the expense of my wages."

In contrast,  although Pennsylvania has not seen a rise in manufacturing employment, those remaining have seen the largest increase in wages of the five states and actually are even back to 2003 levels.  One might wonder why manufacturing workers in Pennsylvania are so angry as the current workforce has bounced back in wages.

Certainly a part of the problem for the slow wage recovery was lack of a meaningful infrastructure program as construction (among other occupations) was very hard hit by the Great Recession.

Steve Ratner continues:

While attention mostly is focused on jobs, it’s important to recognize that falling wages are also a problem – and nothing in Trump’s announcement will address that problem, which is directly a result of trade and globalization, not automation [Emphasis added.  See comment below]. In this category, Michigan – again because of the strong presence of the auto industry – has been the hardest hit, with average hourly wages in manufacturing falling from $28 per hour in 2003 to just over $20 per hour at present. (These numbers are all adjusted for inflation.)*

Though I have great appreciation for him, Rattner is certainly wrong that automation has had nothing to do with the decline of wages by workers.  The wages actually must be below the costs of automation as well as achieve some sort of parity with the wages of the lowest cost countries.**  Low wages in many countries, however, are tempered by the costs of shipping and some other factors like the generally higher price of natural gas in foreign countries.  Thus the cost of selling something in the US. made in China may be more equivalent to, let's say, $8/hr  (as a guess) rather than the $4/hr cost of labor in China, still a large difference.

I get the feeling that the manufacturing worker has been thrashing around for some years, trying to seek a political solution to the decline in manufacturing in the Rust Belt.  In 2008, these people not only changed the "coach" (the president) but also the "team"  (the Senate and two years earlier the House).  Now in 2016, they changed the coach again, but left the team essentially in place.  We should remember that the President-elect won these Rust Belt states by very small margins, suggestiong to me a high level of confusion.  In the 2016 election they actually chose a n"coach" who was in confilct, not only with most of the Democratic Party but the Republican Party establishment as well but left the "team" essentially in place.  We will see how that works out.

(Click on figure to enlarge)

Adding to their problems is that the American worker has been convinced to disarm and abandon unions.  The decline in wages has paralleled the decline in unions.***   While unions may not be very effective, they are workers only hope in dealing with management.

* http://stevenrattner.com/2016/12/morning-joe-charts-putting-trumps-carrier-deal-in-context/

** http://stopcontinentaldrift.blogspot.com/2014/05/plight-of-american-workers.html

*** http://stopcontinentaldrift.blogspot.com/2013/10/a-race-to-bottom.html

GREAT RECESSION VERSUS THE GREAT DEPRESSION

People will forget what you said.  People will forget what you did.  But people will never forget how you made them feel.
Attributed to Maya Angelou

Bad times are shaping the temperament of a new rising generation around the world today just as surely as the original Great Depression did back then.  http://www.forbes.com/sites/neilhowe/2014/11/25/are-we-reliving-the-1930s/2/#c1e217827916

For America to experience a financial collapse is very dangerous, particularly from the political hangover.  In the Great Depression, many people turned to Communism (Soviet style).  fortunately this never took root enough to become a reality.

In the Great Recession, people turned to and elected an unqualified candidate who catered to their basest instincts.  The consequences of this are still to be determined, good or bad.

"The labor market feels very good," Mark Zandi, chief economist at Moody's Analytics, told CNBC. "Mr. Trump is inheriting a very strong economy.  (http://www.cnbc.com/2016/12/02/unemployment-rate-fell-but-a-more-realistic-rate-is-higher.html)  The problem is that the people don't feel it and are very angry.

Just how bad was the Great Recession compared to the Great Depression?

For instance, the Dow Jones Industrial Average fell from its pre-recession peak of 14,164 in October 2007 to a low of 6,547 in March 2009. That’s a 54 percent decline in just under a year and a half.*

By comparison, in the 1920s, the decline in stock prices during the first year and a half was more modest -- about 45 percent below the pre-crash peak.
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Eichengreen and O’Rourke also found the decline in world trade to be steeper, initially, during the 2008-2009 recession.

One of the reasons for the quicker decline in 2008-2009 stems from greater ties between the world’s economies and the refinement of financial technology. Both developments can spread economic problems more quickly and widely.*

On the other hand, the banking collapse in the Great Depression had a much more devastating effect than it did in the Great Recession.  You had deposits insured up to $100,000 and the Federal Government bailed out banks in the Great Recession, mainly by finding other banks to take over failing banks.

After Lehman Brothers fell, "the transmission of that collapse over to the ‘real economy’ -- soaring layoff rates, reduced hiring, and losses of investor and consumer confidence -- was astonishingly fast," added Gary Burtless, an economist with the Brookings Institution.
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It took much longer for the Dow Jones to hit bottom in the 1920s -- three and a half years -- but by the time, the total fall was greater. By mid 1932, the Dow had lost 89 percent of its pre-crash value -- a far bigger loss, percentage-wise, than the 54 percent loss after the Great Recession.

Similarly, in mid 2009, both world equity prices and world trade had bottomed out and started heading consistently upward. That’s only about 10 to 15 months. [bolding and underlining added] During the Great Depression, both statistics hit bottom after about 35 months, a period two to three times longer.*

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In 1929, the annual unemployment rate was 3.2 percent. By 1933, it had peaked at 24.9 percent -- a rise of 21.7 percentage points, or an average of 6.8 percentage points per year.

By contrast, unemployment rose from a low in May 2007 of 4.4 percent to a high of 10.0 percent in October 2009. That’s a rise of 5.6 percentage points, or 2.2 percentage points per year. That’s just one-third of the average annual increase during the Great Depression.

It’s a similar story for gross domestic product. Adjusting for inflation and population, GDP barely suffered a downward blip during the Great Recession, but during the Great Depression, GDP took a whopping eight years to return to its 1929 level.*

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A big reason for the faster turnaround starting in 2009 is the impact of the economic stimulus bill, "which averted a continuing freefall … even though it was not big enough to bring about a robust recovery," said Robert S. McElvaine, a Millsaps College historian

Also see Wikipedia.**

So while overall the economic effects of the Great Recession were not as bad as the Great Depression because of people's insured bank accounts, the bank rescue, and a small "stimulus program,"  the political fallout from the Great Recession may be worse because of the election of an unqualified Republican President, and a continuation of the Republican Senate and House.  In effect, all the electorate did was change the coach.  How much worse, or possibly even better, things will be is yet to be determined, but at least they are given a strong economy to begin with.  Let's hope they don't screw it up.

* http://www.politifact.com/truth-o-meter/article/2013/sep/19/comparing-great-recession-and-great-depression/
**https://en.wikipedia.org/wiki/Comparisons_between_the_Great_Recession_and_the_Great_Depression
http://www.forbes.com/sites/neilhowe/2014/11/25/are-we-reliving-the-1930s/#85367b23a6c0

HOW TO GET OUT OF GREAT DEPRESSIONS AND GREAT RECESSIONS

I'm sure you have heard that Roosevelt's policies did not get us out of the Great Depression but that it was WW-II that did it.  You hear this especially from Republicans.  But it wasn't the war per se that got us out of the Great Depression, it was massive government spending that did it with an assist from forced savings as there wasn't much to buy during WW-II.

So if we wanted to rapidly get out of the Great Recession of 2008-2009 what should we have done.  We should have had massive government spending.  Yes, Bush's (43) TRAP program to rescue the banks had some deficit spending and Obama's small stimulus fund plus his increased Defense budget helped keep the Great Recession from getting worse, but they weren't big enough to get us out of the Great Recession.  In WW-II everyone who had a lath or drill press or spot welder worked  for the government war effort.  So  what was needed was a "war on infrastructure"  of at least several trillion dollars.  But of course, we can go into massive debt for shooting wars but not for building roads, airports, bridges, and buildings, etc.

BUILDER SENTIMENT AT DECADE HIGH

The nation's single-family home builders are feeling a lot better about their business, even as mortgage rates move higher. A monthly sentiment index rose to the highest level in July since November of 2005.*
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"This month's reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth," said NAHB Chief Economist David Crowe. "However, builders still face a number of challenges, including shortages of lots and labor."*

Construction was the hardest hit industry during the "Great Recession," but now has labor shortages.  We missed a major opportunity to do infrastructure improvements at low cost by not doing them in the "Great Recession."
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U.S. commercial real estate is the midst of a big foreign investment boom that is likely to continue, according to one prominent expert.**

China is leading the boom, but money also is coming from Canada, Norway, the Middle East and elsewhere, Jonathan Gray, global head of real estate at Blackstone, said at the Delivering Alpha conference presented by CNBC and Institutional Investor.**

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"There's not a ton of building going on, leverage in the system is reasonable and we still think this economic cycle has a bit of a ways to go," he said. "That's why we're optimistic."**

* http://www.cnbc.com/2015/07/16/builder-sentiment-hits-decade-high-rising-to-60.html
** http://www.cnbc.com/2015/07/15/real-estate-boom-not-over-blackstone-expert-says-at-delivering-alpha.html

CONSUMER SPENDING INCREASES

Consumer spending is having a hard time recovering in spite of the gasoline price bonus; however, it picked up 2.7% in May.*  Note in the figure that consumer spending was dropping for years before the Great Recession. and is about where it was in the first half of 2007.



* http://blogs.wsj.com/economics/2015/06/11/where-did-americans-spend-their-money-in-may/?mod=djemRTE_h

MORE ON THE PLIGHT OF AMERICAN WORKERS

I have written on the plight of American workers before in what I view as one of my most important posts.*  In this contribution I point out as before: (1) the wages of the American worker must be below the cost of automation, and (2) the wages of the American worker must be below the costs of cheap foreign labor moderated by shipping costs, price of natural gas, etc.  But now also add that many low paying jobs have been or are disappearing.   So there is a three way push against low cost labor in America.

And something we are seeing now is the decrease in number of jobs related to the oil industry because of the oil glut worldwide.  It is not going to be a reduction of employees just in the oil industry (field workers, maintenance workers, etc.), but also a ripple effect of workers in related industries.  U.S. Steel, for example, has announced a large layoff of workers related to production of pipe for the oil industry and there are no doubt others.  These relatively high paying jobs are being replaced by lower paying service jobs in food and drinking and health care servers.  There are some jobs returning to the U.S. that overcome the above obstacles, but at an average wage of 23% less than when they were off-shored.**  Because of this, you can get a month like December with good job growth (preliminary 250,000) but a reduction of a nickel in the hourly wages.**

And it occurs to me that wage jobs that cannot be automated or off-shored are just disappearing, where possible, and to the degree possible handed off to the consumer.  Business phones are no longer answered by a person, but you have to "let your fingers do the walking" through an itemized number of steps until you can finally speak to a person, if lucky, when the itemized list doesn't satisfy.  At work, clerk typists but have all but disappeared and even secretaries serve more than one superior.  The typing (word processing and spreadsheets) is largely turned over to the worker.  Gas station attendants have disappeared except in certain places like Oregon where you are not allowed to pump the gas yourself.  Usually only one person now handles a gas station, and their job is more to handle sales from the convenience store part of the station because most people will pay at the pump by credit card.  Low cost buffets are flourishing, though you can still find low-cost "breakfast anytime" eating places where you are waited on by a person, heavily dependent on tips (they are even called tip workers). Supermarkets have now installed slef-checkout isles that often have lines.

So there is a double push against wage earners.  On the one hand their wages must remain below the cost of automation or the low cost labor of off-shoring moderated by the costs of shipping, natural gas, etc.  Then many low pay jobs are just disappearing where they cannot be automated or off-shored and their duties have been taken over by the consumer.

A bright spot in the recovery from the Great Recession of 2008-2009 has been recovery in construction workers which were the hardest hit in the recession.   As a nation, we missed a splendid opportunity to improve the infrastructure of the country at relatively low cost when there were many unemployed workers in the construction industry available.

There may be relatively short periods where wages of labor can rise to livable levels, such as in "bubble economies," but these periods should be of relatively short duration.

As I have said elsewhere, it looks like the Golden Age of American labor is over.*  I don't see where either political party in America has an answer to this, much as they might pretend they do.

*http://stopcontinentaldrift.blogspot.com/2014/05/plight-of-american-workers.html
** http://www.rpc.senate.gov/policy-papers/december-2014-unemployment-report;
http://blogs.wsj.com/economics/2015/01/09/was-2014-really-the-strongest-year-of-job-growth-since-1999/?mod=djemRTE_h

DOLLAR INDEX RECENT HISTORY

The Dollar Index (DXY) was originated by the Federal Reserve and was originally designed before the Euro came into being, therefore it may come as no surprise that the Euro makes up more than 50% (57.6% actual) of the dollar index with Japan being number two at 13.6%.  The Pound Sterling (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and Swiss Franc (3.6%) follow.  The Dollar Index is a weighted geometric mean of these six currencies, our six most important trading countries (Note: China is not on the list.).*

Very recently the Dollar Index has risen sharply, i.e. the dollar has strengthened, making exports from the US more expensive and imports less expensive that will no doubt widen our trade deficit.   Below is a graph of the Dollar Index going back through 2006.  You can see that the Dollar Index is now at its third highest peak since the Great Recession;  however it has been much higher and topped 120 briefly in 2001 and didn't drop below 100 until April of 2003.**  It has remained below 100 ever since.  It dropped below 72 in April of 2008.***  It closed on November 19 at 87.11.

Figure from BarChart: http://www.barchart.com/quotes/stocks/$DXY


* http://en.wikipedia.org/wiki/U.S._Dollar_Index
** http://futures.tradingcharts.com/historical/US/2001/0/continuous.html
*** Actually there was a "flash crash very briefly in the dollar index in April of 2007.